Q2 2022 MagnaChip Semiconductor Corp Earnings Call
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Yeah.
Good day and thank you for standing by welcome to the Q2 2022 magnet chips Semiconductor Corporation earnings call.
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And I would now like to hand, the conference over to your speaker today, Judy as I. Please go ahead.
Hello, everyone. Thank you for joining us to discuss magnet chips with financial results for the second quarter ended June 32022.
The second quarter earnings release that was issued today after the stock market class can be found on the company's Investor Relations website.
Webcast replay of today's call will be archived on our website shortly afterwards.
Access information is provided in the earnings press release.
Joining me today are YJ, Kim <unk>, Chief Executive Officer, and Shin Young Park, our Chief Financial Officer.
YJ will discuss the company's recent operating performance and business overview.
And young will review financial results for the quarter, and then YJ will come back to provide guidance for the third quarter of 2022.
There will be a Q&A session following the prepared remarks.
During the course of this conference call. We may make forward looking statements about <unk> business outlook and expectations.
Our forward looking statements and other statements that are not.
Historical facts reflect our beliefs and predictions as of today and therefore are subject to risks and uncertainties as described in the Safe Harbor statement found in our.
Our SEC filings.
During the call we will also discuss non-GAAP financial measures.
non-GAAP measures are not prepared in accordance with generally accepted accounting principles are intended to illustrate an alternative measure of magnitude ups operating performance that may be useful.
A reconciliation of the non-GAAP financial measures.
The most comparable GAAP financial measures can be found in our second quarter earnings release available on our website under the investors section at Www Dot.
Dot com.
I will now turn the call over to YJ Kim YJ.
Hello, everyone. Thank you for joining us today and welcome to magnet chips Q2 earnings call.
Like to start today by quickly touching on our Q2 consolidated financial results and then give an update on some of the near term challenges. We are facing in the second half of 2022 after that.
I'll give you an update on our capital allocation plan before wrapping it up with a detailed review of our business segments.
In Q2 revenue was 100.
One 4 million and was within our guidance range similar to Q1, our OLED revenue continued to be impacted by severe supply constraints for 28 nanometer 12 inch wafers in our power solutions business continued its positive momentum of double digit year over year with growth.
Forward into the remainder of the year, our second half faces a new few challenges, particularly in our OLED business. There will continue to impact our near term results before recovery in 2023.
First in the second half we are facing further supply constraints of 20 nanometer 12 inch wafers.
Lower wafer allocation from our foundries impacted our new design in our assignments for second half of 2022 from our large panel customer in Korea. Typically is designing assignments awarded nine to 12 months in advance based on future wafer supply.
Second in June we successfully sampled our fully functional next generation OLED driver IC to our new top tier panel customer using our newly qualified foundry partner and customer qualification is proceeding.
However in mid June there were additional feature changes to the OLED driver IC product just sample to meet the current market changes. Therefore, we modified the product design and completed the new tape out in July we anticipate the timing of our initial mass.
<unk> to be around end of the year compared to our previously expectation of the end of Q3.
With that said our customers are going through a full evaluation of the current version of the trip.
Should significantly speed up the evaluation time line of the new chip once it is samples at the end of Q3.
As such we remain confident that our production ramp with this new customer remains on track as we enter 2023, and we expect them to contribute meaningfully to next year's growth while these two.
While these first two events are not related to customer demand. We are also seeing a slowdown in all key consumer end markets, such as smartphone and TV due to continuous stress in the global economy, such as the Ukrainian conflict, the China Covid Lockdown of major cities and.
Globally inflation. These macro factors that are driving an end customer product inventory build in distributor and retail channels, which has caused temporarily auto cuts at our large Korean customer.
Similar market slow down has joined temporarily additional capacity, becoming a variable in the near term. We are in active negotiations with our foundry partners and seeing signs of better allocations in 2023, given these industry market dynamics, we believe it is mutually prudent.
To pursue shorter term supply agreements for the next three years with this decision our board of directors has reaffirmed the remaining $37 5 million stock purchase program that was announced previously we believe that this stock purchase repurchase program and continue to drive.
Our OLED business recovery plan combined with the continued momentum our power solutions business, we are well positioned to drive significant accretion and value for shareholders over the coming years.
Finally in order to improve its internal processes. The company as a board of directors has activated our strategic review committee to assist the board in reviewing considering exploring and evaluating strategic alternatives that may be available to the company to maximize.
Shareholder value. The committees mandate is to review the company's capital allocation plans and actively explore potential strategic and transactional opportunities, including but not limited to joint ventures.
Partnerships and M&A possibilities that may arise in the future and make recommendations to the board regarding those matters are the appropriate.
Now I'd like to move to a detailed review about Q2 results starting with the OLED.
OLED revenue in Q2 was $24 6 million down 44, 3% year over year, and five 7% sequentially. The year over year decline was due to continued severe supply shortage for 28 nanometer 12 inch OLED wafers, which began at the end of 2020.
And worse than.
Last year and this year sequentially OLED revenue decreased due to lower demand for Chinese smartphones and the Korean flagship smartphone.
Really upset by higher demand for the latest generation <unk> flagship models that launched in Q2. During Q2, we made progress in these following areas first.
I already mentioned in Q2, we successfully developed and released our first OLED DVA sample to a new top tier panel maker outside of Korea over the next few years oil production in this region of the word is expected to more than double and we are excited about our growing relationship with.
This catch much second during the quarter, we kicked off development of two new OLED driver IC projects with the top tier panel maker in Korea, we are targeting to begin mass production in the second half of next year third in our new business areas. We continued to ramp our other OLED product.
As the OLED TV and automotive to date, we have three automotive customers with European automakers and initial mass production remains on track for the first half of 2023 five.
Finally, our additional 28 nanometer manufacturing capacity in Asia remains on track to come online in the later part of this year and we continue to engage in active discussions with multiple foundry partners for additional capacity for mobile and TV products in summary, we continued to face challenges.
In our OLED business. However, we believe the strategic actions that we're taking to secure additional wafer capacity together with the recent new panel maker customer and project wins, we will set us up for having a strong recovery in 2023.
Now, let's turn to the power solutions business. It was another solid quarter.
Our power solutions business, driven by strong demand for our premium product.
Premium power products as well as battery FET products, our power solutions business revenue in Q2 was 63 million up 11, 1% year over year and down two 9% sequentially. The year over year growth was driven by continued strong demand across the board for all <unk>.
All of our products, but particularly for our premium products such as our Super Junction MOSFET policy and GBT in key end markets like communication consumer industrial and computing, all driven by trends in electrification of everything.
Sequentially Super Junction MOSFET battery fat and power product revenue decreased slightly in line with the slowdown in smartphone television and competing applications, but was partially upset by growth in medium voltage MOSFET and RGB T. Due to growing demand for E bikes and <unk>.
Solar Inverters.
You know we're Super junction product line, we continue to see robust demand from TV peak power and lighting application due to increasing energy efficiency requirements. During the quarter. We are also awarded a new design for telecom power and we are expanding the lineup for server and premium competing markets for pulp.
<unk> power IC, we were awarded five new design wins for premium display panels from a large Korean display customer and continued ramping shipments of our boost ice's for solid state disk for servers and data centers.
IGT product line revenue grew 36% year over year. This was driven by accelerating demand and new design wins from the renewable energy market, particularly solar inverter applications.
Our medium voltage <unk>.
MOSFET product line achieved record revenue during the quarter due to strong demand in multiple design wins, particularly in power tools Motors and <unk>. Our latest generation 200 volt medium voltage MOSFET with our advanced trench technology demonstrates much low on resistance and fast switching performance.
With higher cell density than prior generations.
Our 40 volts medium voltage <unk>.
Spread for electric.
Water pump in Evs started mass production during the quarter and we are working on expanding the product portfolio to 60 volt for electric pumps power doors sits and windshield wipers during the quarter, we continued to develop and introduce new power products, the new 650 volt RGB.
Provides 30% better current density compared to the prior generation. We're excited about this new product as we continue to see growing demand for solar based application because of accelerating global adoption of solar power to reduce carbon emissions.
In summary, we will continue to execute the growth plan about power solutions business by.
Strengthening fab III productivity, and introducing new products with superior performance and input costs.
Four new markets such as renewable.
Renewable energy market for Q3, we expect our power solutions business revenue to be down due to some softness in consumer smartphone and computing end markets, which will be upset in part by a strong IGT demand for solar applications before I conclude my business summary, I want to.
Say that we feel comfortable about our long term growth prospects both of our business have leading technology and are.
At the intersection of two major trends, we are continuing to focus on executing our OLED recovery plan in 2023, and continuing our success in power solutions business now I'll turn the call over to Shin young and come back for closing remarks, and Q3 guidance.
Yeah.
Thank you a J Lo contemporary one on the call.
With key financial metrics for Q2 totaled.
Total revenue in Q2 was <unk>, one $4 million down two 6% sequentially and down 11% year over year.
Revenue from the standard product business was $91 $3 million down two 9% from Q1 and down 11, 6% year over year.
That's why Jay already mentioned, both the sequential and year over year decrease was mainly attributable to keep your supply shortages in 20 nanometer 12 inch wafers in our OLED business.
Our power solutions business in Q2 maintained its solid momentum as revenue of $63 million represented growth of 11, 1% year over year.
Sequentially revenue declined two 9% due to slowdown in TV and computing applications, but was partially offset by higher demand in solar and industrial.
Gross profit margin in Q2 was 28, 6% below the low end of our guidance range. This represented a 120 basis point decline year over year, and 890 basis points sequentially.
The sequential decrease was primarily the result of a couple of factors.
As a reminder, our Q1 gross profit margin benefited 200 basis points from a one time timing mismatch at lower costs 12 inch wafers that was purchased in Q4 last year and sold in Q1.
During Q2, our large Korea pent up customer committed under volume.
And due to lower demand for China smartphones.
This resulted in an inventory reserve of approximately $4 $7 million related to 12 inch display products.
We also experienced higher foundry cost relating to 12 inch wafers and unfavorable product mix in Q2.
Had we not recorded the material 12 inch inventory reserve of approximately $4 $7 million. Our Q2 gross profit margin would have been 33, 2%.
Turning now to operating expenses Q2, SG&A was $12 $7 million as compared to $14.2 million in Q1, 2022 and $40 million in Q2 last year.
Q2, R&D was $13 $4 million as compared to $12 million in Q1, 2022, and $13 $3 million in Q2 last year.
Stock compensation charges, including operating expenses were $2 million in Q2 compared to $1 $6 million in Q1, and $2 $4 million in Q2 last year.
In Q2, our operating income was $2 million compared to $12 $9 million in Q1, and $1 $6 million in Q2 2021.
Adjusted operating income in Q2 was $4 $8 million compared to $14 $5 million in Q1, and $9 $1 million in Q2, a year ago.
Adjusted EBITDA in Q2 was $8 $5 million compared to 18 $8 million in Q1, and $12 $7 million in Q2, a year ago.
Our tax expense for the first six months of the year was $226 million income tax expense for the first half of 2022, primarily we started from a higher than expected income tax rate is a Richard it is a combination of the change in section 174 of the U S tax code, which requires our.
<unk> expenditures to be capitalized and amortized over 15 years and lower projected Korea full year taxable income.
We believe that there is a possibility that the referred section 174 legislation could be reversed and if such action were to be successful our 2022 annual effective income tax rate would be significantly reduced.
Net loss in Q2 was $3 $3 million as compared with a net income of $9 $5 million in Q1, and a net loss of point $2 million in Q2, a year ago.
Our GAAP diluted loss per share in Q2 was seven cents as compared with earnings per share of <unk> 20 cents in Q1 and zero in Q2 last year.
Our non-GAAP diluted earnings per share in Q2 was 23% down from 20 cents in Q1, but up from 15 cents in Q2 last year.
There were about 46 million shares outstanding in Q2 calculated on a diluted weighted average basis.
Now moving to the balance sheet, our cash balance at the end of Q2 of $273 $8 million. This compares to $284 $9 million at the end of Q1.
Country's seaborne that tutor at $59 $8 million, an increase of 16, 8% from Q1, our days sales outstanding for Q2 was 54 days and 44 days in Q1.
Increase in accounts receivable net in Q2 was attributable to the timing of monthly sales and related payments from certain customers.
Inventories net ordered $36 $2 million a decrease of two 1% from Q1.
Our average days in inventory for Q2 was 45 days and 51 days for Q1.
In terms of our capital allocation plan Q2, Capex was $26 million for the remainder of 2022 and first half 2023, you were expecting previously planned capex related to our factory upgrades and normal capex as well as large foundry wafer prepayments.
The secured capacity.
Certain employee costs, including an annual contribution of statutory severance to start the national deposit accounts.
Our current estimate for these major items approximate between 80 million to $90 million.
Now I'll turn the call back over to YJ for Q3 guidance as well as closing remarks.
Hey.
Thank you chenille.
Let me summarize my earlier remarks, and then I'll move on to the third quarter guidance.
Current environment for oil it is very challenging starting with wafer supply shortage.
By delays in new customer ramp due to spec changes and a slowdown in the China smartphone market due to extended COVID-19 citywide lockdowns and slowing global economy. However, let me highlight three factors that give us confidence about our business long term growth prospect and recovery.
2023.
First we have successfully sample of the oily the trip to our new panel customer and have begun qualification and we expect to grow production by the end of the year. Secondly, we started two new product designs for our Korean panel customer and expect to go into production by the second half of next year.
Thirdly, we are also making good progress in getting more wafer capacity for our display business next year as a result, our board of directors have reaffirmed its intention to award the remaining $37 5 billion stock.
Repurchase program, we believe the recovery of our OLED business and the continued momentum of our power solutions business.
As well to drive significant accretion and value for shareholders over the coming years.
Finally, the newly activated strategic review Committee will evaluate all strategic alternatives to maximize shareholder value I look forward to updating all of you on the progress of our recovery of business during the upcoming quarters.
Now moving to our third quarter guidance.
Results will be challenged by some of the things that I, just mentioned and further OLED wafer shortages as well as cost challenges, including labor due to inflationary pressures.
Actual results May vary for Q3 magnitude currently expects revenue to be in the range of $70 million to $75 million, including about $9 million in transitional foundry services group.
Gross profit margin range of 26, 5% to 28, 5% as well.
And now I will turn the call back over to easier.
Thanks YJ.
That concludes the prepared remarks section of this earnings call.
Greater please begin the Q&A session.
Yeah.
Yes.
Alright. Thank you so as a reminder to ask a question Joe will need to press star one one on your telephone once again that is star one one on your telephone please.
Standby, while we compile the Q&A roster.
Okay.
Yeah.
Alright, Sir for for your first question.
It comes from the line of Susie Desilva from Roth Capital Carolina is now open.
Hi, YJ, Hi, Shin young.
First question on the strategic review Committee I know you've been through this a few times in the past I'm curious why Jay what triggered the formation of the strategic review Committee at this juncture any insight there would be helpful.
Yes, that's it.
Engine, we have reactivated review committee and they are responsible for reviewing considering exploring and evaluating all of these strategic alternatives.
And that is to mainly to maximize shareholder value and one of their mandate is also includes reviewing the company's capital allocation plan.
And also looking at other active.
Active strategic and transition of activities. So I think that is a very good to look at all the alternatives as well as reviewing the company's capital allocation plan.
Okay and then thanks for that and then on the guidance of $70 million to $75 million can you give us a sense of what the mix might be roughly of OLED display rather than power and whether the fourth Q has an opportunity for a display to recover or whether that's more of a early 'twenty three recovery there.
Well we.
We mentioned that the OLED, we expected oil production by end of the year.
And our new foundry is coming on.
Injunction was that.
But as we also said the in second half, we also see a supply constraints from the primary.
Foundry vendor so.
I think.
I'll leave it at that.
And that there was a comment.
Okay, Great and then last question on the 28 nanometer constraints, there's certainly persisting here any sense of when those might be able to kind of come back until a more normal pattern.
Have you thought that'd be helpful. Thanks.
Uh huh.
<unk> made in our remark that in 2023 hour the allocation.
It seems its very improving so.
We are hoping that we can.
The ramp up with the new design win that we mentioned with the new China customer and the two new design in Korean panel maker So force.
Okay. Thanks YJ.
Alright, one moment, while we queue up for the next question.
Your next question.
Comes from the line of <unk>.
<unk> Gill from Needham <unk> Company. Your line is now open.
Yes, Thank you for taking my questions.
Why do I just wanted to get some clarity on on one of the things you said about the OLED business. You said that there is some changes in the design.
I guess the architecture, that's leading to.
Some more issues.
But can you elaborate that I know there is.
Difficulty getting access to 20 nanometer wafers there is difficulty in the overall end market.
Et cetera, but could you elaborate on what's going on the design side.
I guess that would basically prevent kind of a.
Q4 ramp.
It seems like that would be more likely to happen in the first half of next year.
What youre, saying.
Yes so.
What we said is that we sample the part in Q2 in June and the.
<unk> is fully functional but they're in the mid June we've been notified to change some of the feature to meet the current market dynamics needs of the customer. So we had to redesign and re tape out and we.
We taped in July and we expect to sample by end of Q3, which is a few months away. So but the good thing is that with the initial chip which is fully functional.
The customer is doing full qualification. So we expect the when we sample the new trip the evaluation and qualification we schroeder.
We expect to start shipping towards the end of the year. So I hope that answered your question.
And I guess, what's the new design does that.
Okay.
With your <unk>.
Second with.
With your new.
Panel customer.
The customer.
Customer.
One of them, saying, Hey, this is for the Ah outside Korea and panel customer and.
There were slight change in feature additional feature so you know.
I will say.
Can't go too much detail, but it's a minor change we we did in order to meet the.
New market requirements.
Got it okay.
And it seems like it's been very challenging to get one of them seem like it it has been challenging to get 28 nanometer.
Wafers from your from your existing foundry.
That's going on for several quarters now.
With your new foundry that's put in place.
Are you going to start to shift more capacity over the long term or medium to long term over to that second foundry.
In order to ensure that this situation doesn't doesn't occur again or is not leased and not as extreme as it has been where the.
Inability to get access to wafer has really put a huge dent on your on your OLED business in a negative way.
Yes, so very good question so to answer your question the new foundry that is outside the.
Korea and.
That is expected to provide about two to four X of what the wafer capacity. We got in 2022 over the next few years. This new foundry is aimed to serve non Korean panel customers and at the same time, we are in a good negotiation.
With our existing foundry as well and we expect to improve the allocation over the next few years as well.
And then just a couple of financial questions. If I may and then ill step back into queue.
How do we think about the opex.
Going forward the revenue is coming down 43% year over year for September .
Because of the big drawdown in OLED, the big drop in OLED.
Are there any changes.
In terms of Opex to kind of offset that that massive decline in revenue on a year over year basis as you keep the opex relatively the same youre going to be obviously youre going to be moving into an operating loss territory. So just any thoughts there and then.
Also I just wanted to make sure I understood in terms of the Capex.
That is the capex going to be $80 million to $90 million in 2022 because of the severance.
Clear about that if you could clarify on those two issues. Thank you.
And your first question the Opex side I mean, if we look at the components of our SG&A and R&D I mean, the majority of them are fixed costs. So I know that our revenue is coming down. So we are looking into the details of the cost to kind of reuse and try to kind of ways to kind of reduce our costs, but at least for two.
<unk> three I mean, just kind of most of them are already confirmed cost for the R&D materials and the labor.
I don't think that reduction can be that quickly so for us at least for the next quarter, probably our rehab to standby our previously guided for the for the quarterly Opex expenses and on your Capex question No. What we said was our kind of measure our cash outflows for the.
Second half of this year in the first half next year, we're gonna be amounted to $80 million to $90 million, including library is kind of things and one of the item whats. The capex. So capex, we said, especially a capex of $8 8 million earlier this year than normal capex up $20 million, but if you look at our cash flow statement, we've only spent.
$1 5 million. So far so there is 26 $26 5 million kind of remaining which is already kind of committed. So that's one part and we are I mean this one we need to look at again, but that at least for now we are planning about 10 to 15 million Capex in the first half of next year and the severance what I meant was we are.
Looking for it at $40 million expected kind of cash outflow in relation to certain employee related costs.
The annual contribution of statutory severance to certain external deposit accounts to comply with the local labor rules and then we are looking for some cash cash tax payments in the next 12 months amount to 7 million Cpus somewhat bold up those guys. The remaining portion a good portion of the remaining consisting of.
He kind of securing wafers. So we were talking about the quarter net cash outflow exposure of 80 to 90 million for the next 12 months.
Yes.
There are no further questions at this time I would now like to hand, the conference back over to <unk> for closing remarks.
Thank you operator. This concludes our Q2 earnings conference call. Please look for details of our future events on magnitude Investor Relations Web site. Thank you, everyone and take care.
This concludes today's conference call. Thank you for participating you may now disconnect.
<unk>.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Yeah.
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Okay.
Okay.
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